N.Korea: Blockade would be 'declaration of war'

"North Korea said Sunday that a maritime blockade would be a declaration of war, in reference to one of the new sanctions the United States mentioned it could impose on Pyongyang.

The comments came as the U.S., South Korea and Japan launched rocket tracking drills today aimed at improving detection and monitoring of the isolated regime's ballistic missile tests."

Ever since North Korea started launching missiles with greater frequency, World leaders seem to be getting more nervous with every new launch. Obviously North Korea's neighbors are not sitting by and waiting, but are ramping up their own defense forces, which should only escalate matters. The scary part is that past rhetoric, has now been converted over to reality and we just need one slip up by North Korea (where one of its test rockets actually hits Japan) and the world could descend into a major Korean conflict. This could lead to 100's of thousands of lives (if not millions) lost or injured. My personal hope is that everything will be solved peacefully, but I am not very optimistic.

Nevertheless all this saber rattling should do wonders for the Aerospace and Defense Industry and I thought it would be interesting to see how our Investment Algorithm Friedrich would analyze the companies that make up that industry. This article will use a new method of charting stocks that is not Technical Analysis, but instead is called "Quantitative Analysis Charting".

The main metric used in creating our quantitative charts is free cash flow, which makes up a great majority of our investing system. What I am trying to do is analyze each company's Main Street performance and then compare it to Wall Street. Here is a back test I did of the Dow Jones Industrial Average (DIA) from 1950-2009 (60 years) where I back tested what an investor would have seen using a simple Free Cash Flow ratio. The ratio per share used is calculated so.

Obviously, from the results of my backtest I was able to establish a firm foundation to work off of and through a series of original ratios I was able to amplify the power of free cash flow in my analysis of Main Street. Using GAAP (Generally Accepted Accounting Principles) vs. Pro-Forma, which is commonly used by most analysts on Wall Street, I am able to see how each company is actually performing on Main Street. That of course is a strength, but if there is a weakness in our system (or maybe a blessing in disguise), it is that it tends to be ultra-conservative and towards the end of bull markets comes up with only a handful of stocks to buy. I have addressed this weakness by introducing our charting system, in order to assist those investors who are more aggressive than I may be and want to buy and hold or stay as fully invested as they can. I did so by setting up what looks like a technical analysis chart, but is actually a quantitative analysis chart.

This new chart format starts out with the Wall Street price and compares it to three Main Street price (our estimated value) final results for each stock under analysis. Thus I give every user the ability to see at a glance our Algorithm's buy, sell and hold price for every stock under analysis, so each user can know where they stand at all times. Through the use of automation we are also able to analyze entire indices, ETFs and Mutual Funds, which also gives us the big picture of how overbought or oversold such investments might be at any given time. All I am doing in the end is telling you what Main Street is valuing each company at, similar to how a businessperson would do when valuing a company on Main Street. The Wall Street Price is simply the group opinion of what market participants are valuing each company (or the markets as a whole at any given point in time).

My idol is Warren Buffett (BRK.A)(BRK.B) and I have intensely studied his work for over 30 years and what I have learned, from all my studies, is that in the end Main Street is what really matters and if you get the numbers right on Main Street, then eventually Wall Street will come around and soon follow as:

"In the short run, the market is a voting machine but in the long run, it is a weighing machine." ~ Benjamin Graham

The quantitative charts that you will see for each company analyzed are broken up into three categories:

1) Oversold = Bargain

2) Overbought = Sell

3) Hold

Since those are pretty much self explanatory, I will move on and (before displaying a quantitative chart for each company) here are the stocks that we cover for our SA Marketplace service in the Aerospace and Defense Industry.

Company Name

Ticker

Market Cap (Millions)

AAR Corp.

AIR

$1,408

Aerojet Rocketdyne Holdings, Inc.

AJRD

$2,250

AeroVironment, Inc.

AVAV

$1,091

American Outdoor Brands Corporation

AOBC

$761

Astronics Corporation

ATRO

$1,163

Axon Enterprise, Inc.

AAXN

$1,276

BWX Technologies, Inc.

BWXT

$6,095

CAE Inc.

CAE

$4,750

CPI Aerostructures, Inc.

CVU

$79

Ducommun Incorporated

DCO

$314

Elbit Systems Ltd.

ESLT

$6,005

Embraer S.A.

ERJ

$3,563

Esterline Technologies Corporation

ESL

$2,132

General Dynamics Corporation

GD

$61,866

HEICO Corporation

HEI

$6,914

Hexcel Corporation

HXL

$5,564

Huntington Ingalls Industries, Inc.

HII

$10,921

Innovative Solutions and Support, Inc.

ISSC

$48

Kaman Corporation

KAMN

$1,629

KLX Inc.

KLXI

$2,890

L3 Technologies, Inc.

LLL

$15,213

Lockheed Martin

LMT

$90,560

Moog Inc.

MOG-A

$2,998

National Presto Industries, Inc.

NPK

$710

Northrop Grumman Corporation

NOC

$52,039

Orbital ATK, Inc.

OA

$7,624

RADA Electronic Industries Ltd.

RADA

$94

Raytheon Company

RTN

$54,328

Rockwell Collins, Inc.

COL

$21,548

Spirit AeroSystems Holdings, Inc.

SPR

$9,655

Sturm, Ruger & Company, Inc.

RGR

$949

TAT Technologies, Ltd.

TATT

$94

Textron Inc.

TXT

$14,525

The Boeing Company

BA

$160,150

TransDigm Group Incorporated

TDG

$15,541

Triumph Group, Inc.

TGI

$1,462

United Technologies Corporation

UTX

$93,326

Woodward, Inc.

WWD

$4,642

With the introduction out of the way here are our Quantitative Charts for each company. Please click on each chart to expand for a better view.

Doing better on Main Street but Wall Street is way too optimistic. Overbought.

As you can see from the results above, that the Aerospace and Defense Industry is no bargain right now and going forward Friedrich is recommending that those who want to invest in it, should concentrate on the major players like Boeing, Lockheed Martin and United Technologies. Market share plays a major role as those who are in good with the Pentagon do very well and everyone else is fighting for the scraps. If there is a war with North Korea the F-35's as well as other aircraft will play a major role. This clearly is a wake up call for Japan, and even Germany, to get going and beef up militarily as they are within range of North Korea's missiles. The world is going to beef up on defense and companies like Lockheed Martin are sitting in the catbird seat.

In addition to our Friedrich algorithm, we also rely on a tool that I found to be very useful in verifying our work. The Forensic Accounting Stock Tracker (FAST Model) helps identify companies that may be resorting to more financial tricks to make analyst estimates. The model helps pinpoint where management might be aggressive with revenue recognition, cash flows, the balance sheet, and also takes into account valuation and other metrics. Here is the FAST Models result for Lockheed Martin:

In conclusion, it is my belief that free cash flow analysis is the ultimate tool when analyzing companies, and my hope is that you may add the ratio to your own investor tool box in order to help you in your own due diligence. If you have any questions, please feel free to ask them in the comment section below, and don't forget to hit the "Follow" button next to our username at the top of this article, so you won't miss similar article in the future.

Disclosure:I am/we are long LMT, BA, UTX.I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: DISCLAIMER: This analysis is not advice to buy or sell this or any stock; it is just pointing out an objective observation of unique patterns that developed from our research. Factual material is obtained from sources believed to be reliable, but the poster is not responsible for any errors or omissions, or for the results of actions taken based on information contained herein. Nothing herein should be construed as an offer to buy or sell securities or to give individual investment advice.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.